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Public Policy Towards R&D in Oligopolistic Industries

Dermot Leahy and J. Peter Neary
The American Economic Review
Vol. 87, No. 4 (Sep., 1997), pp. 642-662
Stable URL: http://www.jstor.org/stable/2951367
Page Count: 21
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Public Policy Towards R&D; in Oligopolistic Industries
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Abstract

We consider the free-market and socially optimal outcomes in a general oligopoly model with many firms which first engage in R&D and then compete in either output or price. Strategic behavior by firms tends to reduce output, R&D, and welfare and so justifies higher subsidies except when R&D spillovers are low and firms' actions are strategic substitutes. It also reduces the benefits of R&D cooperation. Moreover, policies to encourage cooperation are likely to be redundant (since it is always privately profitable) and simulations suggest that the welfare cost of lax competition policy is high.

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